WFRBS Commercial Mortgage Trust 2014-C20: DBRS Morningstar Downgrades Credit Rating on One Class of WFRBS Commercial Mortgage Trust 2014-C20

DBRS Limited (DBRS Morningstar) downgraded the credit rating on one class of the Commercial Mortgage Pass-Through Certificates, Series 2014-C20 issued by WFRBS Commercial Mortgage Trust 2014-C20 as follows:

-- Class B to BB (high) (sf) from BBB (high) (sf)

In addition, DBRS Morningstar confirmed the credit ratings on the remaining classes as follows:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SFL at AAA (sf)
-- Class A-SFX at AAA (sf)
-- Class X-A at AAA (sf)
-- Class C at CCC (sf)
-- Class D at C (sf)
-- Class E at C (sf)
-- Class F at C (sf)

All trends are Stable, with the exception of Classes C, D, E, and F, which have credit ratings that do not typically carry trends in commercial mortgage backed security (CMBS) credit ratings.

The credit rating downgrade on Class B reflects the loss expectations for the four loans in special servicing that represent 28.7% of the pool balance. Since the last review, the two largest specially serviced loans, Woodbridge Center (Prospectus ID#1; 15.5% of the pool) and Sugar Creek I & II (Prospectus ID#4; 7.8% of the pool), reported value declines, and although the other two specially serviced loans do not have updated appraisals, their value is likely to have declined significantly from issuance considering the depressed performance. For this review, DBRS Morningstar analyzed the loans with liquidation scenarios at a total loss of approximately $158.0 million, which erodes the credit support on the junior tranches, therefore supporting the credit rating downgrade on Class B and confirmation on Classes C through F, which are currently rated CCC (sf) or C (sf). In addition, as of the November 2023 remittance, interest shortfalls have increased to $15.8 million compared with the $9.8 million at the time of the last review.

The credit rating confirmations and Stable trends on the remaining classes are reflective of the generally stable performance of the trust, which reported a weighted-average debt service coverage ratio (DSCR) of 1.94 times (x) based on the most recent year-end financials. The pool is currently in wind down as the majority of loans are scheduled to mature in 2024.

As of the November 2023 remittance, 71 of the original 98 loans remain in the pool with a trust balance of $748.3 million, representing a collateral reduction of 40.2% since issuance. Since the last review, Brunswick Square, which was previously in special servicing, was liquidated from the trust at a realized loss of $25.7 million, generally in line with DBRS Morningstar’s expectations. To date, the trust has incurred a total loss of $27.4 million, all contained to the non-rated Class G. There are 21 loans that are fully defeased, representing 21.5% of the pool balance. Loans representing 45.9% of the pool balance are on the servicer’s watchlist, primarily for upcoming maturity although some loans are flagged for performance-related issues as well. These include the third-largest loan in the pool, Worldgate Center (Prospectus ID#3; 7.2% of the pool), a retail property located in Herndon, Virginia. The loan is being monitored for a DSCR as the largest tenant, Worldgate Sport & Health (46.0% of net rentable area (NRA)) had ceased to pay rent since the onset of the Coronavirus Disease (COVID-19) pandemic. It is uncertain whether the tenant has resumed its rental payments, but the DSCR has been well below break-even since 2021 with the borrower funding debt service out of pocket. The loan is scheduled to mature by May 2024 and, considering the depressed performance, refinance risk for this loan is elevated.

The largest specially serviced loan, Woodbridge Center, is secured by the fee-simple interest in a 1.1 million square-foot (sf) portion of a 1.7 million sf super-regional mall in Woodbridge, New Jersey. The loan transferred to special servicing in June 2020 for payment default and the last debt service payment made was in March 2022. A receiver was appointed in October 2021 and the property is currently marketed for sale.

Performance has been depressed since the loss of the collateral Sears anchor (25.0% of the NRA) in April 2020 and the non-collateral Lord and Taylor in December 2019. According to the October 2023 rent roll, the collateral was 67.5% occupied, compared with the June 2022 occupancy rate of 62.4% and issuance rate of 96.8%. The mall is anchored by a non-collateral Macy’s and JCPenney while the largest collateral tenants include Boscov’s (16.6% of the NRA, lease expiry in January 2029), Dick’s Sporting Goods (9.0% of the NRA, lease expiry in January 2026), and Dave & Busters (3.1% of the NRA, lease expiry in January 2033). Tenants representing 7.8% of the NRA have leases expiring by YE2024. According to the YE2022 financials, the loan reported a DSCR of 0.42x compared with the YE2021 DSCR of 0.95x, well below the DBRS Morningstar DSCR of 1.25x. According to the October 2023 appraisal, the property was valued at $79.0 million compared with the January 2023 appraised value of $86.0 million and the issuance value of $366.0 million. Given the depressed performance and significant decline in value from issuance, DBRS Morningstar liquidated the loan in its analysis based on a stressed value, resulting a loss severity in excess of 90%.

The second-largest loan in special servicing, Sugar Creek I & II, is secured by two adjacent Class A office buildings in Sugar Land, Texas. The loan transferred to special servicing for imminent payment default in October 2020 and the property became real estate owned in July 2023. Occupancy has been depressed with the March 2023 rent roll reporting an occupancy rate of 54.0%, down from the June 2022 rate of 57.2%, and well below the issuance rate of 95.0%. The largest tenants include Teams Inc. (18.9% of the NRA, lease expiry in March 2028), Noble Drilling Services (17.3% of the NRA, lease expiry in December 2024), and Merrill Lynch (3.3% of the NRA, lease expired in April 2024). Upcoming tenant rollover risk is noteworthy with 21.9% of the NRA scheduled to roll through YE2024, including the second- and third-largest tenants. Per the Q3 2023 Reis report, the southwest Houston submarket reported a vacancy rate of 25.8% compared with the Q3 2022 vacancy rate of 25.4%. The property was appraised in July 2023 at a value of $32.4 million compared with the December 2022 value of $42.3 million and the issuance value of $83.5 million. For this review, DBRS Morningstar liquidated this loan from the pool, which resulted in a loss severity in excess of 70%.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

Class X-A is an interest-only (IO) certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology (March 16, 2023) https://www.dbrsmorningstar.com/research/410912.

Other methodologies referenced in this transaction are listed at the end of this press release.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

These are solicited credit rating.

DBRS Morningstar notes that a sensitivity analysis was not performed for this review as the transaction is in wind-down with majority of the loans in the pool maturing in the early 2024. In these cases, the DBRS Morningstar ratings are typically based on a recoverability analysis for the remaining loans.

DBRS Limited
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The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (November 3, 2023)/North American CMBS Insight Model v 1.2.0.0 (https://www.dbrsmorningstar.com/research/422859)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance Methodology (December 07, 2023; https://www.dbrsmorningstar.com/research/425081)

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].